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RIM at risk of writedown as unsold inventory piles up

Research In Motion Ltd.’s stockpiles of BlackBerry smartphones and PlayBook tablets have swollen by two-thirds in the past year because of slumping sales, raising the chances of the company’s third writedown since December.

Research In Motion’s stockpiles of BlackBerry smartphones and PlayBook tablets have swollen by two-thirds in the past year because of slumping sales.

Published on Tue May 29 2012

Research In Motion Ltd.’s stockpiles of BlackBerry smartphones and PlayBook tablets have swollen by two-thirds in the past year because of slumping sales, raising the chances of the company’s third writedown since December.

The value of RIM’s in-house supplies grew 18 per cent last quarter alone, a faster rate than at any other company in the industry, according to data compiled by Bloomberg. And that doesn’t include the BlackBerrys gathering dust at RIM’s carriers and retail partners. Apple Inc., meanwhile, saw its inventory decline 11 per cent in the period from the previous three months.

RIM faces an exodus of customers switching to Apple’s iPhone and devices running Google Inc.’s Android operating system. While the company is preparing to release a new lineup of phones based on the BlackBerry 10 software, the transition makes its current models even less appealing. That means RIM is more likely to record another quarterly expense next month to account for the inventory’s declining value, said Neeraj Monga, an analyst at Veritas Investment Research in Toronto.

“Clearly this stuff isn’t selling,” said Monga, who maintains a buy recommendation on RIM’s stock in anticipation of the company being sold. “Despite all the writedowns they’re taking on the inventory, these inventory levels are not dropping.”

RIM took a $485 million pre-tax charge to write down the value of its PlayBook inventory in December, after shipping just 150,000 of the tablet computers in the quarter. Then in March, the company recorded a $267 million expense for BlackBerry inventory. RIM said at the time that it would stop giving sales and profit guidance because of “ongoing weakness” in the U.S.

RIM’s market share is plummeting. The company’s piece of the global smartphone industry fell by more than half to 6.4% last quarter, according to research firm IDC. Android’s share jumped to 59 per cent, and Apple’s iOS operating system accounted for 23%.

That’s taking a toll on RIM’s sales. Its revenue is projected to drop 26 per cent to $3.64 billion this quarter, according to analysts’ estimates compiled by Bloomberg. Net income is seen declining 72 per cent to $197.5 million. RIM is scheduled to report the results on June 28.

RIM has said it aims to save $1 billion in operating costs this fiscal year by cutting its number of manufacturing sites and is “reviewing its organizational efficiency” across the company. That may lead to job cuts of 2,000 to 3,000, assuming the company will try to save 30% of that operating cost through labour savings, said Sameet Kanade, an analyst at Northern Securities Inc. in Toronto. That would be in addition to the 2,000 positions eliminated last summer.

RIM may cut additional jobs gradually though layoffs and attrition, according to a person familiar with RIM’s plans, who spoke on condition they not be named because the cuts haven’t been made public.

More Than $1 Billion

The value of the company’s inventory climbed to $1.03 billion last quarter, up from $618 million a year earlier. Back in mid-2008, when the BlackBerry was still a hot seller and RIM’s stock traded at an all-time high of $147.55, the figure was less than $500 million.

The inventory tally measures the cost of the phones and tablets stored in RIM warehouses around the world. It doesn’t include the additional stock of devices held by retailers and carriers.

“There’s their own inventory buildup and then there’s the inventory with carriers and retailers,” said Kanade, who recommends selling RIM shares. “It’s more than likely there will be a writedown.”

The stock rose 2.7 per cent to $11 on May 25, the most recent day of U.S. trading. U.S. markets were closed for a holiday yesterday. RIM rose 0.4% to $11.39 in Toronto Monday. The shares have tumbled 75% over the past year and are down more than 90 per cent from their all-time high.

New Operating System

Other mobile-phone makers that have struggled to compete with Apple and Google aren’t increasing inventory at RIM’s rate. Nokia Oyj’s stockpiles rose less than 1 per cent in value last quarter.

RIM is counting on the BlackBerry 10 lineup to revive sales. The software will improve the device’s Web features and allow for new hardware designs — both touch-screen models and devices with RIM’s trademark keyboards.

The company had originally planned to release the BlackBerry 10 phones in the first quarter of 2012. Then it pushed back the introduction to the “latter part” of the year.

In the meantime, BlackBerry customers may hold off on buying older models in anticipation of the new products — a phenomenon known as the Osborne Effect. The term stems from early personal-computer maker Osborne Computer, which filed for bankruptcy after a premature product announcement cannibalized sales of its existing lineup.

In Limbo

For now, RIM is stuck in limbo, said Colin Gillis, an analyst at BGC Partners LP in New York. There’s no new product to upgrade to — or even a release date — and it’s difficult to get customers excited about the older phones.

“Until you have a new product, there’s nothing to transition to,” said Gillis, who advises selling RIM’s stock. “It’s still very much in the early stages.”

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